The Hindu Business Line : From Washington Consensus to India Consensus

The US and the UK now have what India called the social control of banks. But while India wanted to encourage riskier loans by banks, in the US and the UK, the objective is exactly the opposite, says T. C. A. SRINIVASA-RAGHAVAN

Of the many things that history teaches us, perhaps the most important is that anyone who thinks that ideas are inter-temporally valid is bound to be proven wrong, perhaps, humiliatingly, in his own lifetime. Several examples can be given but just one will suffice unto the day: the Washington Consensus.

This much reviled term had a different meaning to start with but, as the 1990s progressed, it came to mean that governments had no business to be in business.

The original idea, ascribed to John Williamson, comprised 10 reform elements and was based on the Latin American experience of the 1980s (see Table 1).

But as it often happens, the term soon began to be applied to gung-ho free-market policies that would enable gung-ho globalisation, especially of the financial sector. The prime movers of this mutated idea were the vehicles of Western finance capital, the IMF and the World Bank.

Weaning the govt out

The latter even wrote an entire World Development Report in the early 1990s, about getting governments and bureaucrats out of business. It was lapped up in India which, after several decades of government and bureaucratic bungling and oppression, had just begun to reform. Reform, as a natural corollary, was defined as getting the government out of business.

In India a bunch of traders, economists and misguided hangers-on started pushing the idea as if it were the only thing that mattered.

After the dotcom bubble and in the avalanche of liquidity that followed during 2003-07, the Finance Ministry and the Planning Commission — which are both politically charged with delivering quick, and easy growth — also began to grind their axes.

Thus, in 2006 there was the McKinsey report on financial development. In 2007, the Finance Ministry sponsored the Mistry Report. In 2008, the Planning Commission-sponsored Raghuram Rajan Committee came out with its report.

The last two had more-or-less the same team of authors. The Finance Ministry also sponsored a hugely expensive project on capital flows. All said much the same thing: off with controls. To be sure, there were differences in nuance. But the message was clear. India stood to gain immense riches by complete financial deregulation.

The sub-text, determined by a host of reasons that did not exclude personal dislikes, was: “Pity we can’t get rid of the RBI; but let us at least give it a bad name.”

Towards this end, a media blitz of the like never seen before was launched, all because the RBI was for going slow. It had never opposed the direction.

The fact that the RBI was voted by several independent bodies to be amongst the world’s finest central banks was ignored.

Full circle

Today, with the need to save the global financial system from the depredations of its own excesses, the wheel has come around a full circle.

Complete financial deregulation stands discredited. The US financial system has become the butt of jokes.

The British government has bought shares worth $250 billion in British banks and the US government is planning to buy around $700 billion worth in US banks.

This will give them a place on the boards and allow them to keep an eye on things. Those who are old enough will recall that, in form, this is almost an exact counterpart of the idea that India had toyed with and — thanks to the political needs of Indira Gandhi in 1969 when she was fighting a battle for political survival — discarded in favour of outright nationalisation. The objectives, however, are exactly the opposite.

The basic idea of social control was rooted in the fact that banks, in those days, were not lending enough to the poor — or, in other words not making enough ‘sub-prime’ loans.

In that sense, it was an instrument designed to increase the riskiness of loans because the Indian government was very unhappy with the risk-averse behaviour of Indian bankers.

In what has happened in the US and UK now, the driving motive is exactly the opposite: first, of course, to save the banks – and not the poor, as the Indian scheme envisaged — through capital infusion, and when that objective is achieved to ensure that they make less risky loans via the place on the board obtained through the purchase of equity.

This is an extraordinary example of the same policy being used to achieve totally opposite ends.

New Delhi Consensus

But, be that as it may, the need-based incursion of government into the financial sector puts paid to the Washington Consensus (Version 2), at least for the time being.

The idea that governments only needed to regulate, leaving the markets to their devices for ensuring the greatest good of the greatest number, now looks very scruffy. It has met the same fate as the opposite idea, namely, that the greatest good of the greatest number can be achieved only by governments and that markets are terrible things.

This suggests that over the next few years the world may well move towards another consensus, which I think ought to be called the New Delhi Consensus.

The crux of this consensus is that not only must the State play a facilitating role, it must also retain the ability to play an active role when the famous animal spirits begin to go out of control.

So, if I may list out its features, the New Delhi Consensus would look like this (see Table 2).

India is almost there on everything except Item 2 in Table 2. And guess what? It is the second fastest growing economy in the world, is politically stable, is a democracy, and for a country with a billion-plus people, has a remarkable low degree of social instability.

No other country can match this, and if this isn’t a good enough model for others to copy, then all one can say is this: the problem doesn’t lie with us.

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